3 VULNERABILITIES OF THE ‘AFFECTED FIVE’
3.2 Examining the Pre-crisis and Post-crisis Patterns of ‘Fundamentals’
As evident from the data trends in current account deficit, export growth rate, government budget fiscal balance and other pertinent macroeconomic variables such as the real exchange rate overvaluation, the ‘Affected Five’
countries (Thailand, Republic of Korea, Indonesia, Malaysia and the Philippines) were vulnerable before the outbreak of the currency crisis of the baht on 2 July 1997. The problem is particularly telling if one looks at the increase in the current account deficit and the slowdown in the export growth rate. This, accompanied by the fragility of the financial sector, in particular, the upsurge in the proportion of non-performing loans, con- tributed greatly to the currency and, more broadly, the financial crisis that followed. Tables 1.1–1.5 (and the corresponding Figures 1.1–1.5) below present the pertinent data for the pre- as well as post-crisis period (1993–2004) and additional comments for each of the ‘Affected Five’ coun- tries separately.9On the other hand, Figure 1.6 through Figure 1.11 present the comparative data for all of the ‘Affected Five’ countries for several important indicators considered one at a time.
As can be seen from Table 1.1 and Figure 1.1, before 1997, Thailand’s CA (current account) balance (as a percentage of GDP) had deteriorated sharply from –5.41 percent in 1994 to –7.89 percent in 1996, while its export growth had declined precipitously from an average growth of 20.11 percent during 1993–95 to a decline of –1.91 percent in 1996, and the fiscal balance (as a percentage of GDP) dropped significantly from 3.01 percent in 1995 to 0.94 percent in 1996. These indicators clearly pointed to Thailand’s serious vulnerability to a crisis, which, of course, unfolded on 2 July 1997.
In the years following the onset of the crisis in 1997, while Thailand had started showing definite signs of turnaround in its external sector indicators as early as 1998 (the CA deficit had turned positive by then), this recovery was not across the board – in fact, the GDP growth rate registered a steep decline in 1998. Indeed, it was not until 1999, that a firmer and more broad- based recovery milestone was reached when, in addition to a sustained CA surplus, the GDP growth rate turned significantly positive, and both the growth rates of exports as well as imports were positive. Thus, for all Asia before and after the financial crisis of 1997–98 33
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Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
CA (% of GDP) ⫺4.90 ⫺5.41 ⫺7.88 ⫺7.89 ⫺1.97 12.66 10.17 7.61 5.41 6.06 5.57 4.39
Export Growth* (%) 13.36 22.15 24.82 ⫺1.91 3.76 ⫺6.78 7.42 19.52 ⫺6.92 5.71 18.18 21.56 Import Growth* (%) 12.35 18.44 31.85 0.62 ⫺13.37 ⫺33.75 16.94 31.34 ⫺2.82 4.45 17.35 26.04
Fiscal Balance 1.89 2.69 3.01 0.94 ⫺1.50 ⫺2.79 ⫺3.33 ⫺2.23 ⫺2.40 ⫺1.41 0.40 0.13
(% of GDP)
Real GDP Growth (%) 8.99 9.24 5.90 ⫺1.37 ⫺10.51 4.45 4.76 2.14 5.41 7.03 6.17
REER (1996 ⫽100) 90.78 92.28 91.54 100.00 93.71 82.39 85.61 79.56 78.11 82.16 80.49 79.12
Inflation Rate (%) 3.31 5.08 5.79 5.83 5.60 8.08 0.30 1.55 1.66 0.60 1.81 2.77
Notes:
Def.: REER⫽real effective exchange rate index (1996⫽100).
* Based on [{Index(t)/Index (t⫺1)}⫺1]⫻100 where Index value for 1996⫽100.
Source: http://aric.adb.org.
35
–15.00 –10.00 –5.00 0.00 5.00 10.00 15.00 20.00 25.00 30.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Percent
CA (% of GDP) Export Growth (%) Fiscal Balance (% of GDP) Real GDP Growth (%) Inflation Rate (%)
Figure 1.1 Macro indicators: Thailand
practical purposes, 1999 is the year that marks the onset of the post-crisis recovery for Thailand even though fiscal balance took a little longer to recover and started to improve only in 2000.
The Republic of Korea (Table 1.2 and Figure 1.2), in a scenario similar to Thailand’s, exhibited plenty of pre-crisis signs of vulnerability – its CA (as a percentage of GDP) turned to a deep deficit in 1996 (–4.41 percent) from a slight surplus of 0.29 percent in 1993, while its export growth slowed down significantly from an average of 18.10 percent p. a. during 1993–95 to a relative trickle in 1996 (3.72 percent) and its real GDP growth that averaged 8.59 percent p. a. for 1994–95, registered at only 6.75 percent in 1996.
While the crisis meant a sharp decline for Korea’s real GDP growth rate (–6.69 percent in 1998), as a whole, it was relatively the least hampered by the crisis amongst the group of ‘Affected Five’ countries. In 1999, Korea’s real GDP growth rate recovered vigorously (10.89 percent), its fiscal deficit started declining as well, and, in fact, turned to a surplus by 2000, which has proven sustainable since. Again, following a decline of 2.83 percent in 1998, the export growth rate resumed a positive trend with the exception of a drop in 2001 on account of the recession in the US, a major importer of Korean manufactured goods (average export growth of 17.35 percent p. a.
during 1999–2004, excluding 2001, which compares favorably with the average of 18.10 percent p. a. for the pre-crisis ‘miracle’ years of 1993–95.
The country’s current account balance also turned positive starting in 1998 though this happened primarily because of a relatively much steeper drop in its trend import growth, which had dropped to –35.50 percent in 1998;
import growth did in fact turn positive by the following year and still the CA balance stayed positive.
In general, ex post, the trajectory of Korea’s macroeconomic recovery from the crisis was a ‘V-shaped’ rather than a ‘U-shaped’ one – that is, quick and sharp rather than dull and drawn out. (See Figure 1.6 in this chapter for comparative changes in real GDP growth rate for the ‘Affected Five’
countries.)
In addition, in the aftermath of the crisis, Korea has had relatively the most to show for its efforts to clean up its financial sector both in terms of the reform of the corporate ownership structure and decreased frequency of the non-performing loans as a proportion of the total debt of the banking system (though no statistics have been noted in the tables in this regard).
Table 1.3 and the corresponding Figure 1.3 look at the case of Indonesia whose economy, like that of Thailand and Korea, exhibited pre-crisis increase in external sector imbalance (CA deficit increased from –1.45 percent of GDP to –3.41 percent of GDP). However, unlike the Thai or
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Table 1.2 Macro indicators: Republic of Korea
Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
CA (% of GDP) 0.29 ⫺0.96 ⫺1.73 ⫺4.41 ⫺1.70 12.58 6.02 2.65 1.93 1.27 1.96 4.05
Export Growth* (%) 7.31 16.75 30.25 3.72 4.97 ⫺2.83 8.59 19.89 ⫺12.67 8.00 19.29 30.97 Import Growth* (%) 2.48 22.13 32.02 11.26 ⫺3.81 ⫺35.50 28.38 34.01 ⫺12.08 7.82 17.55 25.52
Fiscal Balance 0.33 0.26 ⫺1.54 ⫺4.22 ⫺2.71 1.25 1.32 3.80 1.12 0.72
(% of GDP)
Real GDP Growth (%) 5.49 8.25 8.92 6.75 5.01 ⫺6.69 10.89 9.33 3.10 6.35 3.10 4.64 REER (1996⫽100) 91.93 94.13 95.67 100.00 95.98 79.50 86.89 90.03 87.56 93.71 95.52 97.13
Inflation Rate (%) 4.79 6.27 4.45 4.92 4.44 7.52 0.81 2.26 4.31 2.77 3.51 3.59
Notes:
Def.: REER⫽real effective exchange rate index (1996⫽100).
* Based on [{Index(t)/Index (t⫺1)}⫺1]⫻100 where Index value for 1996⫽100.
Source: http://aric.adb.org.
38
–15.00 –10.00 –5.00 0.00 5.00 10.00 15.00 20.00 25.00 30.00
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Percent
CA (% of GDP) Export Growth (%) Fiscal Balance (% of GDP) Real GDP Growth (%) Inflation Rate (%)
Figure 1.2 Macro indicators: Republic of Korea
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Table 1.3 Macro indicators: Indonesia
Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
CA (% of GDP) ⫺1.45 ⫺1.67 ⫺3.34 ⫺3.41 ⫺2.22 4.27 4.11 5.3 4.87 4.3 3.40 1.21
Export Growth* (%) 7.88 9.31 13.39 9.68 7.28 ⫺8.6 ⫺0.37 27.66 ⫺9.34 1.49 6.82 17.24 Import Growth* (%) 3.71 12.95 27.03 5.66 ⫺2.91 ⫺34.41 ⫺11.2 38.06 ⫺7.62 1.06 4.03 42.93 Fiscal Balance 0.61 0.94 2.22 1.16 ⫺0.67 ⫺2.95 ⫺1.15 ⫺1.19 ⫺3.77 ⫺1.76 ⫺1.65 ⫺1.24
(% of GDP)
Real GDP Growth (%) 7.54 8.22 7.82 4.7 ⫺13.13 0.79 4.92 3.44 3.66 4.88 5.13
REER (1996⫽100) 93.02 93.63 91.26 100.00 95.46 48.07 68.06 64.19 63.44 77.92 83.39 78.48 Inflation Rate (%) 9.69 8.52 9.43 7.97 6.14 56.15 19.96 3.93 11.54 11.84 6.75 6.08
Notes:
Def.: REER⫽real effective exchange rate index (1996⫽100).
* Based on [{Index(t)/Index (t⫺1)}⫺1]⫻100 where Index value for 1996⫽100.
Source: http://aric.adb.org.
40
–20 –10 0 10 20 30 40 50
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Percent
CA (% of GDP) Export Growth (%) Fiscal Balance (% of GDP) Real GDP Growth (%) Inflation Rate (%)
Figure 1.3 Macro indicators: Indonesia
Korean cases, Indonesia showed a far less pronounced drop in export growth, partly perhaps because Indonesia has ‘less to lose’. However, while not being in the vanguard of the ‘New Asian Miracle’, Indonesia had started to show real promise when the Asian Crisis struck in 1997. Thus Indonesia was affected significantly as evidenced from the fact that it suffered a negative real GDP growth rate of 13.13 percent for 1997 as com- pared with an average growth rate of 7–8 percent p. a. for the early to mid- 1990s period.
After the crisis, Indonesia recovered to essentially a relatively low tra- jectory of GDP growth rate in the 3–4 percent p. a. range. Notice that unlike others in the group of ‘Five Affected’ countries, import growth in Indonesia was negative as far into the future as the year 2001 and its post- crisis fiscal deficit continues to persist through to 2004, the end of our sample period. Also, Indonesia’s post-crisis economic recovery was accom- panied by relatively higher inflation rates as compared with the other coun- tries in the same cohort. Indonesia was also a victim of relatively greater amount of political and social turmoil in the aftermath of the Asian Financial Crisis.
Table 1.4 and the corresponding Figure 1.4 present the facts for the Malaysian case. In terms of the possible indicators of vulnerability, Malaysia’s export growth dropped to a relatively anemic 5.93 percent in 1996 from an average of 20.10 percent p. a. during the 1993–95 period. Its import growth slowed down considerably as well, essentially stagnating in 1996 compared with an average growth rate of 25.46 percent p. a. during 1993–95. Regarding the country’s CA balance, a somewhat classic indicator of crisis vulnerability, Malaysia’s case indicated an overall trend of rela- tively worsening CA deficits that increased during 1994 and 1995 compared with 1993. (However, the year 1996 showed a substantial CA deficit reduc- tion compared with the preceding year.)
After the 1997–98 crisis, Malaysia’s GDP growth rate was fairly quick to recover – the country experienced a negative GDP growth rate in only one year, 1997, and recovered smartly the following year. Thus, Malaysia resem- bles Korea in this respect. However, what has been unique about Malaysia’s policy reaction to the Asian Crisis was its institution of capital controls – a policy that was at odds with the standard IMF prescription for other countries in East Asia in similar straits at the time. The Malaysian capital control program was looked at with a fair amount of skepticism when it was put in place. After all, Malaysia did not enjoy the huge foreign exchange reserves that China and Hong Kong possessed, to back up their retention offixed dollar pegs. However, in the end, the steady and sustained Malaysian macroeconomic recovery won over several of the skeptics. Thus, in the aftermath of the Asian Crisis, Malaysian GDP recovered fairly Asia before and after the financial crisis of 1997–98 41
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Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
CA (% of GDP) ⫺4.47 ⫺6.05 ⫺9.78 ⫺4.8 ⫺5.18 13.53 15.92 9.14 8.27 7.82 12.82 12.57 Export Growth* (%) 15.72 24.74 25.85 5.93 0.41 ⫺6.75 15.34 16.08 ⫺10.45 5.92 11.60 20.52 Import Growth* (%) 14.32 30.55 31.52 0.1 0.68 ⫺26.14 12.08 25.35 ⫺10.03 7.98 4.84 25.92 Fiscal Balance 0.21 2.26 0.84 0.72 2.35 ⫺1.77 ⫺3.15 ⫺5.75 ⫺5.51 ⫺5.62 ⫺5.30 ⫺4.32
(% of GDP)
Real GDP Growth (%) 9.9 9.21 9.83 10.00 7.32 ⫺7.36 6.14 8.55 0.32 4.12 5.42 7.14 REER (1996⫽100) 93.42 92.53 93.93 100.00 99.08 81.53 82.33 80.94 87.28 89.49 84.79 78.48
Inflation Rate (%) 3.56 4.94 4.06 3.49 2.67 5.27 2.74 1.52 1.41 1.83 1.09 1.42
Notes:
Def.: REER⫽real effective exchange rate index (1996⫽100).
* Based on [{Index(t)/Index (t⫺1)}⫺1]⫻100 where Index value for 1996⫽100.
Source: http://aric.adb.org.
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–15 –10 –5 0 5 10 15 20 25 30
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Percent
CA (% of GDP) Export Growth (%) Fiscal Balance (% of GDP) Real GDP Growth (%) Inflation Rate (%)
Figure 1.4 Macro indicators: Malaysia
quickly while maintaining a low and stable inflation rate, though fiscal bal- ances were continuing to worsen well into the 1990s and even early in the new decade.10
Finally, referring to Table 1.5 and the corresponding Figure 1.5, we turn to a discussion about the Philippines – a country that had just started to show promise when the Asian Crisis hit in 1997. In fact, relative to its ASEAN (Association of Southeast Asian Nations) partners, the Philippines were relatively more vulnerable – its GDP growth rate had averaged only about half of what Korea had been able to achieve in the years leading up to the Asian Crisis; further, for the period, early to mid-1990s, the Philippines suffered from a current account deficit in the range of 4–5 percent of GDP. The country also had its share of political instabilities and crises and, collectively, these pre-crisis vulnerabilities made the recovery period somewhat anemic. Here it is important to note that the ‘Marcos Regime’, which lasted for almost two decades from 1965–85, had been replaced by a relatively democratic institution only for about ten years when the Asian Crisis occurred. Thus, the Philippines were somewhat ‘late bloomers’ whose ascent to a sustained higher economic stage was signifi- cantly interrupted by the crisis in 1997. Still the country appears to have made a sustained, albeit modest-sized, recovery from the crisis. However, the future prospects of the country would depend on continued political sta- bility that the country has enjoyed of late, getting the increasing fiscal deficit under control and continuing to make progress in terms of the financial sector and governance-related reforms.
Incidentally, many of the above observations regarding the pre- versus post-crisis relative performance of the ‘Affected Five’ countries can also be visualized in an alternative format as presented in the following set of Figures 1.6–1.11. Here each figure displays information about a given eco- nomic indicator across countries rather than across economic indicators for one country at a time as above. In particular, note that Republic of Korea’s GDP growth rate was relatively the fastest to recover after the crisis (Figure 1.6) and, relatively speaking, Indonesia had to suffer from the highest rate of inflation in the aftermath of the crisis (Figure 1.11).